Zhongzhi Enterprise Group files for bankruptcy

Zhongzhi Enterprise Group, a prominent Chinese shadow banking conglomerate, has formally initiated the process of bankruptcy liquidation, citing an inability to meet debt obligations amidst a deepening real estate crisis in China. The company’s bankruptcy filing, submitted late Friday, emphasises its clear lack of capacity to repay debts and insufficient assets to settle outstanding dues, as detailed in a statement on WeChat by Beijing’s First Intermediate People’s Court.

China’s shadow banks, like Zhongzhi, function by aggregating household and corporate savings to provide loans for investments in various sectors, including real estate, stocks, bonds, and commodities. Such entities have frequently funded major Chinese property developers. Concerns about Zhongzhi’s financial distress initially surfaced in August when reports indicated the company informing investors about a liquidity crisis. Subsequently, in November, the company declared insolvency in a letter to its investors, prompting an investigation by Beijing police into the debt-laden shadow bank.

While Zhongzhi’s creditors mainly consist of wealthy individuals rather than financial institutions, the collapse of the conglomerate could potentially undermine general market confidence and reignite worries about the trust industry, posing broader implications for the troubled real estate sector, according to analysts at Commerzbank.

The fallout extended to the broader market, with the CSI 300 index dropping 1.2% in early afternoon trading, with property stocks bearing the brunt. Hong Kong-listed shares of property firms like Logan Group, China Vanke, Sunac, and Longfor Group experienced declines ranging from 2% to 3.6%.

China’s government has been actively working to curb the rapid expansion of non-bank debt issued by shadow banks in recent years. The dominance of state-owned banks in China has made it challenging for non-state-owned businesses to access traditional bank financing, contributing to the growth of shadow banking. The government’s crackdown on shadow banking, which real estate companies often used to acquire land from local governments, has also impacted the country’s massive property sector.

Analysts, such as Zerlina Zeng from CreditSights, do not anticipate a government bailout for Zhongzhi, citing the non-standard nature of its wealth management products, some of which resemble a Ponzi scheme. Zeng warns of potential additional trust loan defaults, highlighting that underlying investments are linked to local government financing vehicles and real estate debt, with local governments prioritising public debt over trust loans.

China’s property market has grappled with a debt crisis since 2020, with major real estate players like Evergrande and Country Garden struggling to meet financial obligations. The sector, directly and indirectly constituting about one-third of China’s economic activities, faces challenges as Beijing initiates a broader deleveraging effort to address the previously inflated real estate sector. Despite sluggish home sales growth and prices, the government’s measures aim to address economic imbalances.